In this episode I had the opportunity to chat with Alex Zanghellini, exploring his journey from AI/computer science to enzymes, and the co-founding of Arzeda with Nobel Laureate David Baker.
Alex chose to bypass finance and found proteins as wonderful machines and became motivated by solving problems and finding products for market applications. Alex reflected on how discovery shows that something is possible, but that it is a small part of the journey to a commercial product, and that journey is the fun! We immediately reflected on the role of hope and the roles of hopium and OPM (being other people’s money).
The early steps at Arzeda were taken through a fee-for-service model, with no venture backing. Alex reflected on how this impacted profitability and the opportunity this created to experiment and ascertain how ready the technology was. Identifying gaps allowed Arzeda to build on the technology licensed from the University of Washington and identify unmet market needs. This early phase of project-based revenue allowed the team to learn what technologies were needed to complement the translation of leads to products.
We reflected on the balancing between internal and external capabilities and the shift towards a partnering business model. The limitations of this model were discussed, including an inherent dependence on other parties for future license revenues, the lack of a clear valuation playbook for this sector, and no direct line of sight on manufacturing. We touched on some of the wisdom of Ganesh Kishore from Spruce Capital Partners around the need to have products in-house to capture value alongside external partnering. Further to these insights emerged the challenge of incumbency. This brought me back to the discussion we had with Ray Miller in Episode 3 around the Sorona journey to market, and more recent discussions with Roger Wyse in Episode 45 around the challenges of competing against fully depreciated assets.
Alex then shared his thoughts on how to find pockets of opportunity, given the breadth of product choices that industrial biotechnology has as product targets. Alex noted that while there are advisors and the business team, at the end of the day business development needs effort (elbow grease) and time; ‘Never stop talking to industry and be ruthless in the assessment of opportunity.’ We then reflected on time, and how to stay patient in business and market development and that tech transfer cannot be sped up. We discussed translation and the challenge of time was discussed (way back) in Episode 2 with Oleg Werbitzky from Alpha Lyncis and the realities of taking short cuts through this phase with Catherine Livingstone in Episode 50. The need to be transparent with investors around these factors and not getting ’over your skis’ is critical in managing cashflow risk.
We spent a little time talking about ‘pivoting’ and discovered our mutual discomfort with the use of this phrase. We agreed that it means different things to different people, but Alex saw this as a need to add skills and competencies, not a change in business model. We touched on whether this might be an easy excuse for not learning from history? And on learning from history, we found ourselves discussing the broader challenges of due diligence. Alex noted that it’s difficult to do this in industrial biotech as it’s a multifaceted challenge and there is a need to find very experienced people to know what questions to ask – which may be challenging in such a young industry? Perhaps it is not appreciating the complexity of due diligence which makes so challenging?
We closed out our wide-ranging discussion by circling back on the venture financing story, when and why venture investment was sought, and the benefits of having optionality on when they sought venture finance. Alex then remarked that enzymes and biocatalysts are a revolution in the way we make things.
This conversation really covered some ground, and it was good for me to reflect on some of our very early and more recent conversations on the podcast and how things tied together through the experiences and journey of Arzeda. I was delighted to get a chance to unpack my issues with the term ‘pivoting’ but it also got me thinking more deeply around due diligence, why it may be harder that it looks, and some new ways to look at this important part of the new venture journey.
I hope you all get something from this insightful discussion with the CEO of a world-leading innovator.
Transcript
CB: Hello, everyone. Welcome to Tech Transfer Talk. My name is Cameron Begley, Managing Director of Spiegare. Joining me today, Alex Zanghellini. Alex has quite the history and most significantly, the Co-Founder and current CEO of Arzeda and working closely with David Baker, a recent Nobel Prize winner, has formed up quite an organisation around protein engineering and product development. And I’m very excited to talk to Alex today. Alex, welcome to the podcast.
AZ: Thank you Cameron. Thank you for having me.
CB: Oh, an absolute pleasure. And as we get going, Alex, I should thank Neil Parry from Unilever. Alex, how did you get into the position you’re in in terms of the journey from university and what got you interested in not only the protein engineering part, I guess, but also turning this into an extraordinary organisation.
AZ: Yeah. No, it’s actually interesting that you mention it because I always look back at what I’ve done, and they signed me to, uh, my fate was not to do protein design. Actually, I was trained as a computer scientist in France as a maths and physics major. Was really more into engineering, right.
I just kind of serendipitously learned about proteins. So, I was the masters in AI deep learning type of things. And at the time you really had two choices. It was not the right time for AI, actually, back in the early 2000 it was, believe it or not, in this day and age. But, uh, it was hard to find a job. And so I did that. And then you had two options really for applications.
CB: Right.
AZ: You could either go to finance…
CB: Yeah.
AZ: …and kind of just making computational models for finance and interesting but not really what I wanted to do as an engineer.
CB: Yeah, yeah.
AZ: Or look at biology. And so I happened to have, uh, learned for the Pasteur Institute about proteins and then came on what I want to say is it was an ‘a ha’ moment for me, right.
CB: Yeah.
AZ: Uh, being trained as a physicist and an engineer to realise that proteins are these wonderful nanomachines. that do everything in nature, like most of the world as it is today. The oxygen we breathe today is due to the fact that life invented enzymes. And these enzymes have changed the world. And so when you guys kind of have a moment, it was like, well, if we could actually use some of the advanced computational techniques that I was working on, can we help solve a problem of designing these wonderful molecular tools to make the world around us better, right.
CB: Yeah.
AZ: That’s really how I went into it. And I started to read compulsively about proteins and got excited by the day. And then working the company in biotech in France, public company now exists. You know, we got more and more excited about it and then realised that David Baker, in your introduction, was one of the upcoming stars into using these computational techniques to engineer protein more efficiently.
CB: Yeah.
AZ: So, that’s how I got into it. I did my PhD with David, but always again, that’s why I mentioned my training as an engineer. To me, I love scientific problems but at the end of the day, if you don’t release them into products that people use when you have scale, you don’t really have the impact that I wanted to have. And so, to me, it was always obvious that I would take that technology that I contributed to build along with a lot of other people and, and then find applications to change, particularly how products that we use are made and do it in a more sustainable way. So, that’s really the genesis of my journey of two hours a day, which obviously embodies.
CB: That’s an incredible starting point Alex, and I just want to grab a couple of points, as you’ve mentioned there. One is this issue of timing. It’s not unusual at all that these scientific endeavours are inevitably ahead of their time from a marketing or product perspective. Many is the time that the scientists or the science teams make their discoveries, inventions, early steps, and it’s another decade before you actually get any sort of commercial traction, for want of a better word. I’m also quite curious, thank goodness you didn’t pick finance, I guess that’s, you know, that’s probably not like-because finance would have had the money, I imagine; biology perhaps had the adventure
AZ: That’s more important to me.
CB: Yeah. So, I think picking the adventure was the better choice for all of us involved. But what I was really interested in is, just taking it back to basics, that phrase you use that enzymes have changed the world. And when you really think about it, enzymes really enable all biological life. We may even get onto the structural proteins, but it’s incredible that you identified that from your early experiences and engagement and saw that, you know, that world open up for you through the computational view of the world as opposed to the biological view of the world.
AZ: Yeah. And I think that’s again, where training as an engineer would always position your mind to think, ‘Can we go beyond what nature has been doing?’ Again, this is a fantastic catalyst, right. Think about it. Enzymes are the best synthetic chemist that the world has ever seen. No human gets close to their performance, right. Very complex reaction, very mild conditions, super selectively, no waste. And so, the first question as an engineer, as a quantitative person is to think, ‘Why can’t we fast forward?’ We can’t wait for evolution to come up with a solution we need. But we want to use these wonderful tools. So, how do we actually connect what we’ve learned how to do over the last decades, to engineer them more intelligently so that we can expand beyond what nature has done? And that’s really what has been driving me in, I just wanted to comment on what you said, that it’s absolutely true. There’s a big gap between a scientific discovery or showing that something is possible and actually making it robustly work in products, but that to me, that’s where the fun is at, right. Where I’ve always been frustrated and I hope I don’t piss off people in your audience.
CB: Please do. Oh no, we love that, Alex. So, just get in there.
AZ: Yeah. Because actually what always was frustrating to me, like, I love academia, I love the university research because you have the freedom to push ideas and check that they work. But what I always find from Australians is you see a lot of people, you know, making nice papers, but sometimes you’ve shown that it’s possible, it’s 5% of the work. Like as Edison said, right; 99% of the work is all the nitty gritty details.
CB: Yeah.
AZ: But you have to very, very painstakingly go through to actually make this producible and usable and really change things. But to me, that’s what fun is at, right. Because it’s great to show. And we did that in my PhD. I showed for the first time that we could design new enzymes that catalyse new reactions. Great. And yet it took us 15 years to get to the point where this actually becomes a product that people can go into a store and buy.
CB: Yeah.
AZ: And that is the pleasure of showing that you can do that. The impact there.
CB: Yeah. Alex, I don’t think you’re going to piss off anyone in the tech transfer community with that comment.
AZ: That’s right.
CB: Because I think a lot of folks in tech transfer and sort of in the early stage, innovation companies that are out there, understand that the discovery was necessary is nowhere near enough to actually find your way out to a product. I’ve discussed this with Roger Wyse, actually, these distortions that happen early on in the discovery phase where everyone thinks the discovery is worth so much money and it’s going to do everything. And yet the amount of effort and money and time that’s required to move from that point of demonstrated discovery all the way through to a product, whatever it might be, seems to be discounted to zero very quickly.
AZ: I agree, I think my contention was more, uh, to be honest, sometimes what annoys me is that you get a very basic proof of concept. Let’s say, let’s take an example of enzymes degrading plastics, right. Where you didn’t use, that are just, you know, oh, new enzyme design, solve the plastic problem. And yet it actually doesn’t do what we need to do to actually solve the problem. That’s what I was going after. But I totally agree with you. It’s not meant to be, academic research, very important, but I think we have to be cognisant of how we present things because otherwise the general public thinks it’s around the corner and it’s not, right.
CB: Yeah.
AZ: Just having an enzyme can do 1% of plastic degradation is not the same as having a robust technique to do that at scale all the time. And that’s…
CB: Absolutely. And there’s this interesting dance that I think we play from discovery to product, which is that dancing around the hope, uh, we refer to it sometimes as hopium. So, where you’ve got to sell the hope, right. And you’ve got to sell a story that gets people engaged, the funding people open their mind to the possibilities. And there is this delicate dance that we have to do. A colleague of ours, friend of the podcast, Paul Martin, he’s a hydrogen guy. Deep engineering experience. We talk about hopium and opium, hopium being the hope and the opium being other people’s money. And they’re the two critical ingredients for getting from the bench to scale. The idea, though, of solving problems and releasing products for applications, I think this is really where I’m most interested in the journey, you, Alex with the Arzeda journey. I’m interested in what that first opportunity was. So, you’ve done that initial body of work. You’ve started to realise you can now do the protein modelling. How did you uncover that first client or that first opportunity and engage with them because you are selling for the first time and you’re trying to bring a new concept into the market?
AZ: Yeah, that’s always difficult, right. I think finding, you can call it product market fit or technology market fit, but I think that’s where, that’s what’s very difficult for everybody really.
CB: True.
AZ: Um, and so for us, we started, again back out of David Baker’s group. We really had shown it’s possible to design enzymes using computation, right, which was really a big thing. And then we started by kind of a model that was more a fee for service type of model, right. We were not venture backed. One thing that’s very unique about our data is that we actually only became venture backed quite late in our, in our, and in our process.
CB: Yeah, I’m interested in that.
AZ: Yeah, we just have the company, uh, by providing effectively services to the big chemical and pulmonary, chemical and pharmaceutical companies. And what it did, it didn’t necessarily generate a lot of money, right. But what it did is that it allowed us to kind of do an experiment on two things. One is, to an earlier point, is the technology ready? We thought it was not, was not right. The success rate and the performance was low enough that it needed to be improved. And so we got to work, and we did a lot of work with our team to kind of incrementally build on our initial license from the University of Washington and already build an industrial grade computational design platform. So, that’s the first thing we did. The second thing we did is that it allowed us to kind of play around and see what are some of the unmet needs in the marketplace where designer enzymes could really enable value.
CB: Mhm.
AZ: And as I said, it’s very difficult, right. And I will tell you there is a lot of false starts, a lot of things we’ve done where for a variety of reasons either technologically didn’t work well enough. Although that’s not the main, most of the time we’re able to actually get enzymes that worked well enough. It was really more about what the path to market and how long would it take from the design enzyme to a workable solution. For example, how big has the scale, the scale need to be, right.
CB: Yeah.
AZ: Do you need to have a lot of other technology developed to go around and with the enzyme, so to translate into a marketable product? And so, we figured out that that was actually very difficult. There’s not a lot of opportunities where you can do that rapidly. And so, we took effectively eight years to build the technology, to improve it, and to kind of develop that understanding of what would be the best place to deploy the tech.
CB: This is really interesting, this issue of the path to market. And you’ve mentioned there scaling and other enabling technologies. What do you mean by other enabling technologies? There’s these ideas that you need ecosystems of other things to line up. What was it that was the enabling technology piece or pieces that you found were missing early that you developed or came along?
AZ: Very great question. Think about what it takes to bring an enzyme product to market, right. You can think of a design technology. At the first step, you create in small quantities in the lab. But ends at, does what you want it to do. Well, the next question is okay, so you’re going to have to produce that enzyme at a price point that’s economical. So, you need to be able to engineer a fermentation route or something like that to produce that enzyme at scale. And that means a lot of things. You have to have strain engineering to engineer the strain. You have to be able to develop fermentation processes. There’s a lot of expertise that go into that. You have to develop downstream processing, the recovery.
CB: Yeah.
AZ: In a way that’s scalable and economical. Then you have to work with a CMO or a manufacturer of sort. Could be your partner, could be a CMO. You have to develop the expertise to do that. So, these are all technology we didn’t have at the beginning, right. We just knew how to design a nice enzyme in a test tube.
CB: Yeah.
AZ: And it goes even beyond that strategically, right. At the beginning we thought, ‘Okay, well, enzymes are used not only as singular products. They are also used in metabolic pathways’, right, within a cell. We enable the cell to be a cell factory. So, we got very excited by that. But once you do that, there’s more than the enzyme. You need to have the enzyme, multiple enzymes. You have to understand the metabolism. Metabolomics, proteomics, and all of these tools have to be in place for you to capture value, really. And we didn’t have that. So, further the learning curve. But we figured out first how to pick the first products so that you don’t have so much of a stack of things you need to develop, which will take you ten years and 1 million dollars.
CB: Yeah.
AZ: And secondly, how do you onboard the critical technologies like fermentation? So, you need to have all these tests inside your platform to be able to bring a product to market.
CB: Yeah.
AZ: And so, that’s really, I hope I answer your question, but it’s all the other things that you need to do to have a workable solution to the market.
CB: Yeah. So, there’s clearly a set of decisions in there, Alex, around how much you internalise and how much you externalise. So, thinking through the timing of Arzeda’s development, metabolomics is a thing that’s really rocketed along over the last 10 or 15 years. But fermentation capacity, DSP, to some extent, are a little bit more traditional. So, did you find yourself externalising some of those things that were more off-the-shelf and internalising some of the more leading edge stuff? How did you make those decisions about what to bring in-house and what to partner?
AZ: Yeah. So, interestingly, actually we, I would say, almost figured it out along the way.
CB: Right.
AZ: Uh, so maybe it’s worth stepping back and looking at our trajectory and how we unfolded over the last decade. So, as I said, we started with fee-for-service, right. Think about just the technology necessary to design an enzyme, validate it in the lab, and kind of work with partners to take that off, right. And I think that was a smart thing to do at the beginning, because you can’t be everything at once, right.
CB: Yeah. Yeah, sure.
AZ: So, we did that. Then the second phase where we started to be able to go more towards optimisation of the enzyme and the lab setting, and we built the infrastructure to do that. So, that’s the second phase of a company, which was really from a business model perspective, was what I would call partnership driven, right. Where you have a partner according to DuPont or a BASF. Not necessarily partners. We have to give you a sense of type of partners. And then you go to a certain point on your own, and then you work with them and you hand it off to them for them to set it up.
CB: Yep.
AZ: And what we found is that would be a great model from a business model perspective. But what is difficult in the industrial biotech space is that, chances are that these partners will not push it forward, right. So, for a variety of reasons, very happy to go through. And that’s the first part. The second problem is in our industry, I think contrary to pharma, there is no clear playbook to value an opportunity along the way. So, let me do a side note here on pharma, pharma model for biotech. It’s pretty well figured out, right. When you go up to preclinical, you know how much you’re going to value an opportunity when you pass clinical. When you have phase one and a phase two, it’s a clear playbook of value, as well as partners that look for phase two assets and then buy it out and develop.
CB: Yeah.
AZ: In our industry, it doesn’t really exist and certainly did not exist ten years ago. No playbook. So, we kind of figured it out along the way. And so the first phase, the third phase of a company, number three. Was we, the company as it is today, and we developed internally the capability to go all the way to product manufacturing with CMOs. And we still use partners to go to market partners. But by the way, we control the process a lot more. We capture more value. It’s also easier for a partner to understand when to partner with us, because we’ve already demonstrated scalability, which is where a lot of companies have stumbled, I think, along the path in our industry, and once you’re there, you really have an inflection point. And so, to your question, we’ve built these capabilities over time. And today we’re very well integrated from AI design to testing and validation to manufacturing with a strain to deployment, and even quality to sell the products to our go-to market partners that take it and then formulate it.
CB: That’s really fantastic getting that history. And it reminds me very much of some conversations I’ve had with Ganesh Kishore over the years around the idea of having your own products, and not depending entirely on licensing, and what I gathered from the experience you expressed when you mentioned partnering with chemical industry companies, is that you’ll get to a point. I assume you were licensing it off, but then you’ve got no control over what happens, and you’re dependent on them doing something for you to get paid. And if you can’t control that, you’re stranded. You’ve done all that great work, that future, that future royalty stream doesn’t materialise and your value creation dries up accordingly.
AZ: Absolutely. And I think, I do understand why the industry and us at the time, it’s a very appealing model, right …it’s very appealing because it’s capital light…
CB: It is.
AZ: It’s faster, potentially. You also leveraged partners that know what we’re doing, right, and have scaled processes and have the sales and marketing channels. So, it makes a lot of sense on paper. But unfortunately, I actually think with the exception of America, which I think is going around the corner, that model today for 20 years and then pops to them to have done that because it’s very difficult. Um, I think it’s not been really successful. And I think, I asked myself the question a lot, ‘Why is that? Right? Because again, the model on paper makes perfect sense. I think again, coming back to the value playbook, I think there is an issue on the value that a partner will put on the licence until you’ve already demonstrated it at commercial scale.
CB: Yeah.
AZ: So, that’s a little bit of an issue. But I think the other one is, there is a lot of learning that you have to do along the way. And although some of these partners have the right expertise, will they have the right push or the right commitment to actually bring it, to your point about control, right.
CB: Yeah.
AZ: You are the mercy of, even a great company, changing tack and decided, deciding two years into the process that you know what, strategically they don’t want to do it anymore. And so, I think it’s very important for years by the way, in a way that you can get the IP back and, and push it forward on your own if you can. You’ve done it. Some of the products we have today are exactly the outcome of that. From a tech transfer perspective, you have to think about that.
CB: Yeah. The reason I’m smiling, not that anyone listening can see that, is that I’m almost crying because of that phrase you used of being at the mercy of companies changing tack. I stood on the wrong side of that decision when there was a management change many years ago with a licensee. And, you know, the deal just collapsed in, not in seconds, but just a complete change of strategy. As you say, you’re stranded. There’s an interesting other aspect to this, which I think comes partly into the challenge that industrial biotech has, that pharma doesn’t seem to have. And what I’d like to propose is that challenge is incumbency. So, generally speaking, industrial biotech is looking to deliver a product or an outcome into a market that already exists, and you’re either trying to do it, generally at a lower cost or maybe serving an immediate adjacency. You know, and we had the chance to talk to Ray Miller about Sorona and 1,3-PDO, which was, I think, a really elegant case of using biotech to deliver a molecule that’s industrially relevant at a lower cost. But the challenge in that is one of incumbency. So, you’ve already got an industry that’s established. And you, we, the market, the industry, has to come in and outcompete capital that’s already on the ground, probably fully depreciated. And you’ve got to get in there and green has no premium. I think everyone’s learnt that lesson now after 20 years. So, you’ve got to compete on cost. I suspect incumbency is a significant challenge that the industry has to face, and I’m interested as to whether that’s been a factor in your decision to completely internalise or the way you’ve dealt with opportunities.
AZ: Yeah. I mean, I think if you think of it as three levers that you can play with, right. The first lever is cost, as you said.
CB: Yeah.
AZ: The second lever is performance, right. Are you bringing something that is markedly better…
CB: Yeah.
AZ: …compared to what petrol chemistry or the incumbent technology brings? And the third one is regulatory, right. In some cases, you do have the regulatory push that forces the marketplace to adjust. I think a best example of that was the refrigerant and the ozone treatment, right. That’s an example where the industry has been very successfully switched to another solution, but not because they wanted to; because they had to.
CB: Yeah.
AZ: And so, this is really what you can play with. And you’re absolutely correct in two of them, whether it’s performance or cost, you are going against very established, very efficient and largely amortised capital and it’s hard.
CB: Yeah.
AZ: Um, and so, I think it did play a role, to your point about being able to internalise it, because you can then look at both performance and cost. You can actually have a workable solution that’s already derisked. And if you are providing, let’s say, you know, very disruptive cost for an existing product in a market that’s not monopolistic or oligopolistic, then you have a chance to be able to actually go for certain customer segments and build that. And once you have done that, you are in a position where you now start to have similarly depreciation and you can continue being competitive. But I think the key is that you can’t be 5% less expensive. You have to have significant, you have to use technology to really change the game in terms of the cost structure. And that’s why we stayed away from, let’s say, some of the chemical commodities, because of scale and because of that issue. You want to find yourself in a position where an enzyme system or biotech system is so much more efficient that it becomes inherently competitive right from the start, even at lower scale. And I think to me, that means you need to look at functional molecules that tend to be that high value, lower volume first, over natural products that are difficult to manufacture all the way.
CB: Yeah.
AZ: That is a good place to be, for these reasons.
CB: Yeah. And it does make sense to be pursuing those niches or segments that are less volume to service, higher value. They take some uncovering though. My experience of the chemical industry is, there’s a plethora of products out there but uncovering those little pockets that are amenable not only to change but at the right scale and value, is a really challenging process to go through. How did you find your way into that process? Because that’s a business development and, you know, almost industry experience, that you have to bring into your organisation.
AZ: Yeah, it is very difficult. And, uh, I mean, it reminds me of the conversation I had recently with one of our advisors who actually worked for a big chemical company. And when he was, you know, brought in, uh, that very large chemical company, they had the same problem. ‘What should we make with this?’, right. So, it’s not just early stage companies that are facing this problem. Every company that is looking at using biotech, for example, has this issue of ‘What should we make?’ It’s a very, very, very important problem. So, to your question, ‘How do you do that?’ Uh, I think that’s part of where you mentioned, industry knowledge. And you can rely on your business team, obviously. You can rely on advisers that I spent a lot of time in these sectors and know it intimately. But at the end of the day, unfortunately, I think you also have to spend, the elbow grease and the time. It takes time to uncover solutions so you can have, you know, precise metrics to assess, be very disciplined in how you assess the value of a molecule and its market dynamics. But at the end of the day, you need to continuously have this process running, right. And we don’t stop, for example, at Arzeda, we do have multiple products, that are in the commercial stage. But we never stop doing that, right. We never stop going to… and we never stop talking to our advisor. We never stopped doing our own research and kind of, surfacing potential and being ruthless in the assessment of these opportunities. And for a thousand that you uncover, you’re going to end up looking at a hundred and maybe do a proof of concept for ten and only one will go to market.
CB: The standard funnel. So, you funnel them in. But you caught a particular idea there which I’m interested in, which is the time factor. So, everyone’s in a hurry all of the time. But I got the sense there, Alex, that this just takes time and you can do your best to hurry it up, but you’ve got to make haste slowly. You use that term, ‘ruthlessly assess’. Perhaps another phrase that’s been used previously on this podcast is ‘relentlessly pursue’. But it takes time. And when I think about how your early financing got started, you mentioned earlier and I intend to explore, how do you stay patient internally with the financial pressure, where you’re trying to sell a service in the first instance and then trying to develop molecules and maybe license a few and hope that some revenue turns up? But that’s a very interesting tightrope that you’re walking there.
AZ: I think, Cameron, the important part is that for nearly ten years we were not venture-backed, right. So, I think that if we had been at the time, we would be probably out of business.
CB: Yeah.
AZ: Um, and so I’m not saying that everybody should do that. Uh, it’s a long time. And people would say, ‘Are you crazy? You dedicated, uh, nearly 15 years on building this…’
CB: Yeah.
AZ: And it’s a long journey. I mean, a lot of people are not ready to do that, but I do think that you do need the time. You need the time to be able to, you need to create as an organisation. Enough financial stability that you can test a lot of things and figure out what works first. And you have to do that, it is the proverbial lean startup model, right. Which in biotech there is no such thing as a lean startup. But for the sake of the argument, let’s say it’s the closest you can be.
CB: Yeah.
AZ: How can you decrease the cost of the time to test a lot of things? And then once you have some that you think have promise and it can work, you are absolutely correct. You have to factor in that time is not fungible with money, unfortunately, not in our industry. You need to maintain the urgency. And I’ll tell you, today at Arzeda we have the same urgency as day one. We think this is important. We treat everything we do with urgency. That said, when you deal with a CMO and it takes six months to do tech transfer, to do it right…
CB: It does.
AZ: …you can’t speed it up.
CB: Yeah.
AZ: You can’t. Not having two more million on it will not speed it up.
CB: No.
AZ: When you look at regulatory, we had to go through regulatory for some of our products. Even industrial products are subject to regulatory oversight, as they should be. And so, whether it’s a food or whether it’s an industrial enzyme, it’s going to take between 6 months and 12 months. And that’s something that you can’t change.
CB: No, I think you and I both had that conversation with Neil, who we mentioned earlier. And in fact, we were talking with Catherine Livingstone recently, who’s an Australian leader in the innovation system over here. And she spoke about the fate of companies that try and skip the translation and scale up stuff. And if you skip it, you don’t get there because you don’t go through the discipline or the learning or make sure that everything is right from a quality and cost perspective.
AZ: Absolutely. I’ll tell you from our experience and from our advisors and our network experience, I don’t know of a single technology that was scaled and, you know, to commercial scale in one go, that didn’t require … You tech transfer anything to a CMO, you will have to do several engineering batches because something will go wrong. And we’d love to think that it’s not the case. And I hope at some point it’s not the case. But the reality is that it is the case. And so, to your question, I think it’s part of being upfront to your financial investors. And a lot of them understand that; the ones that have been in business. We are fortunate to have very good investors that understand this business. So, if they don’t come from, let’s say, another field and assume that you will scale in two months, and that’s not feasible.
CB: Yeah.
AZ: So, you need to have both transparency to your investor base and we need to know this field enough to understand that this is what it’s going to take. And the last thing I would say is that means you need to be as frugal as you can be. Not for the sake of being frugal, but because chances are it’s going to take you two times t plus one because of what we talked about. And so, if you get ahead of your skis and other invested, or increase your burn in the hope of accelerating things, and we don’t accelerate, which as you, as we just discussed, when it comes to scale up and and then process engineering, can’t really speed them up, then you have the race to effectively run out of money. And I think so many great technologies didn’t go forward because of that. And I’m not saying we solved it. It would be our…
CB: No, no, no.
AZ: But I think we’re trying to. I’ve always been the way I’ve run the company and the board has run the company, we’ve always been very careful with managing our spend. It doesn’t mean we don’t invest very hard on what is important, but always do it very carefully, because chances are it’s going to be longer than you expect and you can’t run out of money on the process.
CB: Yeah. I’m very interested in the comment that you made there about the transparency with the investors and, you know, being quite open and honest with them about setting expectations, which I think is absolutely necessary. But I want to tie that back to a passing comment you made around that there’s no lean startup in biotech, and that I took as a sort of an inference into the digital world, where ‘Lean Startup’ is all the rage, because basically you can sit at home and away you go. Whereas biotech is a bit more infrastructure intensive and asset intensive. I’m just going to put a question to you around whether the world of digital investment has somehow distorted the expectations around biotech, and maybe more broadly, by physical startups and ventures where things just don’t flip in 2 or 3 years in the biophysical sciences like they can in digital. Has this created a challenge for you around, not only around raising when you got to it, but in terms of finding the right investors and the right finance?
AZ: Yeah, I think absolutely. I think you’re pointing the finger on something that is very important for deep tech in general and in biotech in particular. Uh, it’s very capital intensive, even if you’re very careful, by nature of it. Any physical object that you have to manufacture is a lot more time and capital intensive. And you’re right, it changes the expectation of return, right. You can’t have the same return in the same time frame as a social media company or even to some extent as an AI company. Uh, when you look at physical things, it doesn’t change the fact that it’s very important that we develop this technology. It’s very important we have both government companies and investors relying on this. But I think part of the challenge has been for industrial biotech in particular, is that stuck between pharma and digital. Digital, you have this exponential scale with relatively lean capital, potentially.
CB: Yeah.
CM: Pharma is also very, probably more capital intensive. But the nature of the pharma business is that the margins are a lot higher. And so, you can bang everything on one product. That could be a $10 billion product. Industrial biotech is in between. Doesn’t mean it’s not a good investment opportunity. I think it’s a fantastic investment opportunity, but you need to have people that understand where you are and what your expectations can be.
CB: Yeah.
CM: And in particular, for industrial biotech company, what I think it means is that you need to have a platform that allows you to generate multiple products over time. So that you can leverage multiple products, and then you have a chance to be as lucrative as a pharma company. But you’re not going to do that with one product. And I think a lot of the first wave of industrial biotech and bio, uh, really got into a trap. If you remember about a few days, ‘Where did that come from?’ Is if you’re a typical venture investor, you’re saying, ‘Okay, I’m okay to invest a couple of hundred millions, but I need to have a secondary term and very quickly’, if it’s a one product play, which a lot of investors wanted to see, you need to go for very, very large volume because that’s the only way one single product would have a chance to get you there.
CB: Yeah.
AZ: And I think it didn’t work. No, the model would try to follow is a is kind of a portfolio of products that each very variable gets you to the 100 million range or more. And then stack them up and do well in the platform but you can be faster and better at doing it every time.
CB: Yeah.
AZ: And we’re fortunate to have a broadly enabling platform that we believe enabled us to do that. It’s a very difficult play. It’s a very difficult investment plan. I would not want to be one of these, uh, industrial biotech investors because it’s been a difficult journey for them as well.
CB: Yeah, there’s no doubt it’s been challenging. And, Alex, I think you really summarise the challenge quite nicely there around being between pharma and the digital world that we find ourselves in industrial biotech. And I’d, I’d even go a little bit further to say there are a range of other material science players, not necessarily biotech, but they have the same challenges around scaling up and binding customers and all the things that I think apply to industrial biotech. I think industrial biotech has that additional problem that there’s still a certain disruption element to it, in that it disrupts incumbency. The material science guys are sort of substituting into assets. They don’t need too much change. Whereas when we turn up with one of our enzymes, it’s sort of, ‘Well, we expect you to change all these other things because we don’t need to run at 300 Celsius and 55 bar pressure now, so you can scrap all that stuff.’ And of course, they don’t want to do that.
AZ: Yeah, absolutely. That’s, uh, the transition cost is always an issue for people.
CB: Yeah. One thing that does interest me is that you mentioned that, you know, you’re building a stack of products, which I think makes enormous sense. And there’s been a lot of learning along the way. One of the catchphrases of the mid-2020s, at least in the world of startups and early stage ventures, is this idea of ‘pivoting’. Now I have an allergic reaction to that word, and most of the listeners would know that by now, because when you think about pivoting, it’s standing in the one spot, turning in a circle. So, great for basketball but not necessarily great for moving an organisation on. How did you continue to change tack through these early stages? Because it’s something that everyone talks about doing but I’m not sure it’s actually done that well.
AZ: Yeah. No, I am not a big fan of the word either. And I think, uh, people can mean different things to me. And half of the time, again, to be a little bit provocative.
CB: Yeah.
AZ: It means oops, we are wrong. Uh, all our first assumptions were wrong, we have to change. And to us, if you would characterize the pivot for what we’ve done, I would not say pivot; it’s recognising that we have to add certain skill competencies to be able to maximise value.
CB: Yeah.
AZ: In other words, our business model has not changed or our business has not changed. What has changed is, along the way we recognise that there are things that we need to add to it. So, that further part of our discussion, to be able to capture more value, to be able to be more in control and therefore have a higher probability of success.
CB: Yeah.
AZ: But sometimes what happens the wrong way with word ‘pivot’ is, in our industry in particular, I see that as also a cheap excuse to not having learned from people’s previous experience, right, The example I like the most is, coming from the computational side, right, originally. You know, every ten years people try a model that we know doesn’t really work, in my opinion, which is we’re going to do software for biology and we’re going to be a software company and we’re going to be back. And that, I think there is fundamental reason where that doesn’t work very well.
CB: Yeah.
AZ: And so you see periodically companies that start out every 5 to 10 years and then they pivot to, ‘Oh, now we’re gonna make our own products or we go into partnerships’. But that’s something that we’ve learned, I think as a field over time, right. And so, that’s not a good pivot. I think it’s a pivot that we didn’t do our research strong enough.
CB: Yeah.
AZ: Um, but there are people that make sense. And I think the ones that make sense are really where you started with some concept, uh, for your product and you realise that the market doesn’t want exactly that product you want – P Prime, call it P Prime. That’s perfectly fine. You need to pivot agility, but just to where the market tells you But it’s not a 360 degree pivot; it’s an adjustment to the way things are.
CB: What I thought was interesting there is not learning from either their experience or from history, and I think that’s a really powerful way to describe it, it’s a bit of a cheap excuse. ‘Oh, we’re pivoting’, which is we’re not learning. And sometimes people embark on these new ventures when they’re not really new at all. And this brings me to an issue, I’ll call it, that’s emerging here in Australia quite quickly. And I don’t know whether it’s a thing in North America or in Europe, but there seems to be a profound lack of due diligence at times, around either what has happened within an organisation before we make the next decision, or perhaps even what’s happened historically. My favorite example of that, Alex, is hydrogen, that no one seems to have sort of looked up thermodynamics or the last 50 years of history, but here we all are again. But have you seen or made observations about this due diligence from your perspective, particularly after ten years, you then got the investors in. They would have gone through the books pretty thoroughly, I would imagine.
AZ: I think a lot of investors do great diligence, right. But I think what you’re pointing to is, it’s difficult in our field to do very good diligence. And the reason I think it’s difficult, it’s, it’s really a multifaceted problem, right. Think about it, you have the technical diligence of these, the technology, or the enzyme. It’s already an enzyme. Is it good enough to meet the performance that you need?
CB: Yeah.
AZ: Then you have the economics of your product. And what are the assumptions behind it? To your to your point about hydrogen, and there’s a lot of examples of that. The thermodynamic, the kinetic, the technoeconomics, always matter immensely. But it’s not easy to, you need to be very experienced in this field…
CB: Yeah.
AZ: …to really know what questions to ask. And I think what you’re saying, and I think we’re seeing that in the US as well, is you have people that come into the field that don’t necessarily have the experience of the network to ask hard questions.
CB: Yeah. Interesting.
AZ: I don’t blame them. It’s very difficult. I think we’re seeing now, you know, after 10, 15 years of synthetic biology, industrial biotech, you’re seeing a lot of people now knowing what we should be paying the most attention to. But as I said, when a new industry is created, people learn along the way, right.
CB: Yeah.
AZ: So, you need to really ask those questions. If I was an investor, I think I’ve learned the question I would ask for a new bio or …it’s very important.
CB: I think you’ve hit on a really interesting way of looking at it, and it’s got me now thinking even harder about due diligence, because so many ventures and paths to market are multifaceted. The days of a single straight line are, if they ever existed, they’re certainly not there now. So, it’s interesting that maybe it’s not a lack of due diligence. Maybe it’s a lack of understanding of the complexity of the due diligence. And not, and not necessarily, maybe not recognising it, let’s start there, but maybe not being able to access the right skills to get that due diligence done to the levels of thoroughness that are needed before, to preinvestment. So, that’s really interesting. It’s that multifaceted stuff that makes it inherently difficult to do, and particularly in industrial biotech, where, as you say, you’re trying to bring together not just the enzyme or the product itself, but all the steps down through the value chain and the technical economics and, and even regulatory aspects, which you touched on earlier.
AZ: Exactly. If you think of it, you have the technology assessment, you have the technoeconomics and the manufacturing assessment, which in itself can be extraordinarily complex, right. You have the regulatory, and you have the market dynamics too, which I think there’s a lot of products in our industry, right. You mentioned incumbency, that’s one, right. How the market’s structured, it doesn’t really matter. Because even if you have the best tech and the best techno economics, you may find yourself in a situation where there’s only two players in the field. And guess what? We’re going to lock you out, right.
CB: Yeah.
AZ: Even if you have a much better mousetrap. So, that’s so much. If you think of it as an, let’s say as an investor, the team that you have to assemble to do very well. And of course, you have some pressure when you do investment on both sides of the table, right.
CB: Yeah.
AZ: You don’t have an infinite amount of time. And so, I think it’s a very difficult problem. And now when we’re thinking about it, how could we make it better? Maybe what we need is a bigger network of kind of, people from these different sectors that share their learnings in a way, right.
CB: Yeah.
AZ: And it’s the industry is not old; it’s not like the chemical industry where people have spent 70 years, so, we cannot figure it out, right…
CB: Yeah.
AZ: For us, we’re still very much in an emerging industry.
CB: I agree, I would contend. Synthetic biology, industrial biotechs, maybe 20, maybe 30 years old.
AZ: Yeah. And none of the products on the market but has, had, have made it right.
CB: Yeah. Not many at all. So, we are very young. It should mean that that cohort of, of experienced practitioners may not be very big, which is possibly good in that you know where to find them, but possibly bad because there’s not enough of them.
AZ: Absolutely. And then that also ties up to, it’s almost an inefficient market because I think the right advisors exist but the question is who is doing the diligence? Do we have access to them? Do we know who to talk to, right? And it’s hard for, let’s say, an investor, right, um, back to our people.
CB: Before we wrap up, I’m just want to come back to the timing of this venture funding that you sort out, Alex. And you made the point that, you know, there are periods of frugality and discipline in managing money and what you were focused on, and yet you chose to. I’ll say, hold out on the venture capital for a decade, maybe a bit more. Why was it that you made that decision to hold out as long as you did, when maybe venture capital could have at least made it a bit easier for you in terms of cash flow, although it would have maybe brought other challenges with it?
AZ: Yeah, I think part of it was, when we and my co-founder and I started the company, I think we wanted if possible to stay in control and, and build traction before we had to go into the venture world. I think intuitively, what we recognised without formalising it at the time is, we don’t really know how we want to point the gun. And so, let’s figure out what we really want to do before we start to have venture investment and then the clock is ticking, as it should be because of the need to have it. So, I think there was a both a conscious and a half conscious decision to understand better what we want it to be. We knew that we wanted to build a company that made sustainable products that were better; that we knew’ with intention. But exactly what are you going to do, right? And how are you going to understand where you’re going to be positioned? We felt that we were not ready to have the pressure of a venture investor, at the time.
CB: Yeah.
AZ: At the same time, we would not be where we are today if we had not taken venture investment, because, the moment we had a clear view of where this technology that we developed could really bring value and how to create products with it, in what sector. Once you have that, then it would have taken us 4 years to do the same thing by just taking the margin that our service business was generating, and we actually shut down the service business along the way. So, I think I don’t know if I answer your question well, Cameron, but I’m trying to say that venture has a critical role to play as an accelerator. But if you push the accelerator when you’ve not put your hands on the wheel yet, you’re going to have a problem.
CB: Yeah.
AZ: So, where do you want to go? You have your map. You want, you need, you know, where you want to go. A pretty good, pretty good path forward that you mapped out. Then you can accelerate, right. And that’s where venture really plays a critical role.
CB: Uh, no, I think that’s a terrific answer, actually, Alex, and I like the analogy of having the hand on the wheel. The other thought that flashed through my mind is having the car pointing in the right direction, because when you press that accelerator…
AZ: You’re going to go.
CB: You’re gonna go. And if you’re pointing in the wrong direction, you need to pull the wheel harder to come back. And that, of course, takes energy and time and money and all those sorts of things. I like that idea of acceleration but making sure you’re in the right direction with the hands on the wheel so you actually know how to drive the car and in which direction you want to head. So, that makes enormous sense to me. I think it’s a testament to how things have gone at Arzeda. You could actually pick the time that you wanted, that I think is arguably a reward for good discipline, because not everyone gets to choose the timing that they need. That venture capital and acceleration. And that’s then sometimes lead to things being driven off in the wrong direction.
AZ: Yeah. No, no, that’s absolutely true. And I’m sure and I agree, it’s not reproducible for everybody. I think we were lucky. Uh, the reason we could do that is because we had a, a broadly enabling platform, right. So, we had the optionality to generate revenues as a service business and kind of build the muscle and the direction as we talked about. Uh, unfortunately, I think it’s not applicable to every model. And, uh, I think it depends on the situation, right. If I had to do it again, uh, you know, if I had a product in mind already, I probably would go a different route. But if I, let’s say I’d spin out from an academic lab or you had a prototype and we did all the techno economics and we knew it was good and I would go directly to venture out. But we had this optionality. And to be honest, we learned along the way, too, right. So, yeah, could it have been a little bit faster. I’m pretty sure it could have been…
CB: Yeah.
AZ: …that’s what learning is, right? So, you get smarter as you go. So, if I did it again I would probably do it a little bit faster. Uh, but it doesn’t change the fact that that model I think has been quite successful. Uh, gave us the time and manage expectations from our investors. And again, we were fortunate to have investors who also understand things very well in the type of business.
CB: Yeah, yeah. Fantastic. So, in bringing things to a close, Alex, where to next for Arzeda and for you? So, the foundations are strong. The venture funding is allowing you to accelerate with the hands on the wheel and pointing in the right direction. So, where does the road lead you now, over the next 2 to 3 years, with changing circumstances in the United States, for better or worse, and a world that is crying out for sustainability, but perhaps not embracing it at the speed we’d all like?
AZ: I’m very excited where we are today, and I think the main reason for that is having a product or a profitable product on the market. But we’ve scaled up and seeing tremendous traction. It is an anchor, right. Again, not a lot of industrial biotech have been there. And so, I think it’s very fortunate to be in that position. So, to your question now I see a very exciting path for us, right. And the reason why is you mentioned sustainability, right. I don’t think, I don’t view ourselves as just providing sustainability. I think enzyme design and cell free bio catalysis, which is what we do, is a revolution in the way we make things and enables you to have better products. So, not only, it’s not just sustainability, it’s better product, more affordable product. In a time where we need to obviously deal with higher inflation. So, it can be a deflationary technology as well as sustainable technology, that kind of rewire the way we make things and ultimately enable new products. The way I see it, Cameron, is we’ve established a basis of products that are profitable for us, that have allowed us to continue building and go towards really new products, things that now can really move the needle in performance, all of that being sustainable. So, I’m very excited by that. And so, ultimately we want to tackle big problems, right.
CB: Yeah.
AZ: So to us, can we make a dent on carbon? We have enzyme technology, I think we can.
CB: Yeah.
AZ: But you need to be able to walk the walk. You need to be able to have a financially sustainable company that’s highly profitable to have to see it through, right. Can we make a dent in fertiliser and ag-reduce our dependence on petrol chemistry for that?
CB: Yes.
AZ: I fundamentally believe we have the technology to do it. And so, I’m very excited because I see us as having passed the corner of, of having demonstrating the business model and the value and now having a springboard to create even more game-changing product and having the credibility to do that.
CB: Yeah, that is a fantastic way to set the vision for Arzeda and for closing things out today. I absolutely believe that protein biochemistry and green chemistry, synthetic biology is going to do those things. And I like the way you framed about changing the way we make things. I think that’s actually a really nice vision for where synthetic biology can take us.
AZ: Yeah, and to your question about the environment and the environment in the US, I see it as largely irrelevant. And the reason why is, what we’re doing is not just improving sustainability. We’re also reshoring and manufacturing with this technology, right. Being able to manufacture in the US or in Europe from agricultural products at a competitive price. Think about it, right. Even sustainability was not part of the picture.
CB: Yeah.
AZ: That in itself is attractive.
CB: Yeah. True.
AZ: For us. And so, for all of these reasons, I think this is a trend. It’s not just us, of course. This is a trend that is here to stay. And I’m pretty sure, and I hope when I retire, that this is going to be the way we make things. And you’re going to see more and more product made that way, creating high paying jobs, sustainable high performance. And I think enzyme design and protein that is the linchpin to that.
CB: No, Alex, I think you’re absolutely right that this is a strengthening trend around the world, and synthetic biology may just be that enabler for that idea of reshoring and bringing manufacturing back to whatever jurisdiction, as you mentioned, you know, US and Europe. And it’s a thing in Australia at the moment as well, with some policy initiatives. So, I can certainly see synthetic biology playing a major role in getting that reshoring done. So, the future looks bright. The hands are on the wheel, the foot’s on the accelerator. Sounds like there’s petrol in the tank.
AZ: Let’s go.
CB: Well, it shouldn’t be petrol in the tank, now. It should be electrons in the battery, really, to be technically correct. So, with electrons in the battery, Alex, it’s been terrific having you on the podcast. Thanks so much for joining us and look forward to our next conversation.
AZ: It’s been a pleasure. Again, thanks for having me. And I really enjoyed our time.
CB: Thank you.